The European Central Bank should stick with its cautious stance on lowering interest rates, Chief Economist Philip Lane said — further strengthening expectations for the next cut to come in December rather than October.
Citing economic risks that could yet shift inflation in either direction, Lane on Monday stressed the importance of setting monetary policy on a meeting-by-meeting basis, contingent on incoming data.
“A gradual approach to dialing back restrictiveness will be appropriate if the incoming data are in line with the baseline projection,” he said in a speech. “At the same time, we should retain optionality about the speed of adjustment.”
ECB officials are united in saying borrowing costs will fall further following last week’s reduction in the deposit rate to 3.5%. They won’t be drawn on the precise pace of cuts, however, highlighting persistent upward pressure on prices in sectors like services.
Lane’s remarks suggest a third reduction in the ECB’s deposit rate next month is unlikely, barring major economic turbulence — an idea that Governing Council member Peter Kazimir reinforced earlier in the day.
“We will almost surely need to wait until December for a clearer picture before making our next move,” he said. “I would require a significant shift, a powerful signal, concerning the outlook to consider backing another cut in October. But the fact is that very little new information is in the pipeline.”
President Christine Lagarde shared similar sentiments on Friday, saying that another move in October would require a large economic shock.
Lane said headline inflation is expected to fluctuate over the next few months.
Price gains are “expected to be low in September before rising again in the latter part of this year,” he said. “Negotiated wage growth will remain high and volatile over the remainder of the year, given the significant role of one-off payments in some countries and the staggered nature of wage adjustments.”
Speaking separately, ECB Vice President Luis de Guindos said officials want to maintain “as much optionality as possible” with regard to setting rates, given the level of uncertainty.
“In the future we have been very clear — we don’t have any pre-determined path for rate reductions and we’re going to go meeting by meeting,” he said in Madrid. “Nobody on the Governing Council knows what’s going to happen in the coming months.”
With assistance from Macarena Muñoz and Daniel Hornak.
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